Letter from London

Back in New York from a solid week of meetings in London (17 in five days) and a few observations, reflections, musings, and speculations come to the fore. And no, these will pointedly not include whether the US or the UK’s version of being seized by political dementia—The Donald vs. Brexit—is more awe-inspiring, nor what inferences might be drawn from the two countries’ distinctive preferences in nonstop televised indoor sports: Poker (US) or snooker (UK).

By way of background, our meetings covered a cross-section of Law Land: US- and UK-based firms, global players and boutiques; firms embracing new technology and “agile” working and firms dismissive of new-almost-anything; and perhaps most importantly firms with clearly articulated strategies and those seeking new compass readings.

A couple of issues, as you might imagine, came up with some regularity, including compensation and the so-far unanswerable but large question of whether new entrants (Axiom and Riverview but also potentially looming far larger, the Big 4 Accountancies) would find market acceptance and make serious inroads.

But another issue outweighed all of these put together. We’ll come to that.

Compensation

Given the venue we’ve been in the past week, much revolved around lockstep, and modifications thereof, and around its Dark Star twin, “checkbook recruiting.”

Regular readers know to a fare-thee-well and irregular readers could safely venture an educated guess that I approach the world from both an economic and a frankly American perspective. Both of these clearly influence my instinctive views on compensation, and to me constitute backdrop realities—but I try to look far beyond my own intellectual reflexes and focus on the reality, the history, and the aspirations of the firm in front of me.

So, to compensation.

We all have been immersed in the lockstep/eat-what-you-kill debate for years and years and I will have mercy upon you and not rehearse it here. The only reason I feel compelled to bring it up is that for many (a majority?) of people in the market it seems to be the primary defining distinction between the UK and the US, or London and New York.

I’m not so sure I buy this anymore. To be more precise, as soon as the terms come up (lockstep/EWYK), all intellectual and analytical processes seem to shut down. You almost never see people actually thinking through the virtues and vices of what each of those caricatured extremes represents, and where on the spectrum from one to the other their firm ought to operate in the market right now.

Instead, what happens is that one phrase or the other is lobbed into the discussion and all involved are supposed to assume, if they’re on proper behavior, that a show-stopping riposte has just been delivered. Heads nod and the subject changes.

I can’t believe this is anything other than intellectual laziness. Indeed, I’m developing a hypothesis that the extreme variety among and multiplicity of law firm partner compensation models might reveal something interesting about just how much room for flexibility and change a firm’s compensation structure might actually be able to eperience without existentially rending the firm’s fabric. Let me explain.

1 Comment

A faithiful reader who prefers anonymity sent us this private email and graciously consented to having us republish it without attribution. For context, our commenter is not US-based.

I have just read the ‘Letter from London’. As always a really interesting piece. I thought you might be interested in my ‘two penny worth’ on the main points raised.

Compensation – I think the challenge for firms here is less about lockstep v EWYK and more about if we want something different how do we change. Historically (in my view) most compensation systems have evolved without much thought of the behaviours that they drive and while everyone made money it didn’t matter. Now firms may want to change (in order to drive different behaviours) but require partners to vote for that change in order to push it through. On the assumption that if you were so unhappy with your compensation you would have left already it is not surprising that the status quo is an attractive option for todays partners even if he behaviours it tolerates (or encourages) put the long term future of the firm at risk.

New entrants – I think they are here to stay, are already stealing market share and will only continue to do so. As traditional firms talk about wanting the ‘high end complex work’ they are by definition restricting the size of their market (only so many market changing M&A deals or disputes a year) and they cannot support the number or scale of firms set up for them. The big four made plenty of mistakes in the pre Enron era but seem to have learned from most of them. The key point you raise about being able to tell their professionals to march is incredibly well made, one of the main differences between the two industries and benefits the accountants. I don’t think the accountants care about doing the world’s sexiest deals they will happily watch the Magic Circle and White Shoe firms at the top of the directory rankings when they see themselves at the top of the profitability / revenue scales.

New York/London axis – In a world with such growing free agency of lawyers I think it will become harder for firms (without retained earnings) to make genuinely big bets. I think the future for law firms is a world with many different business models (not just the ubiquitous pyramid) and the best firms will get very profitable first before they have any thoughts of trying to get big. If a London firm merging with a NYC one (or vice versa) means more profit lets do it. if not why would we? Big for the sake of big, I don’t think will prove to be any protection from market forces. Cross Atlantic mega-mergers will I suspect happen again but fewer than we might think. The growth of 2 and 3 partner boutiques makes me think that partners are recognising that size is a vanity issue for many.